Day three is now underway in this correction. Corrections are important to reign in animal spirits. Some faulty logic has been widely espoused along the following themes:

-a hope that less bad economic data means "green shoots" as in the economy will be back to healthy growth rates soon. Not quite.

-a hope that rising commodity and oil prices means manufacturing and industrial demand is on the rebound. Not yet. China and other countries with cash have been stock piling for anticipated demand later. See World Bank says China recovery hopes premature.

The world has also been showing an aversion to the US dollar again the past couple of months. This aversion has pumped up the value of U$ priced commodities like oil, gold and copper. But these price hikes don’t signify a rebound in demand or organic growth, just the same old hedging and speculative investment that we saw spike and then crash markets in 2008. Remember that commodities and energy are late cycle leaders. Price spikes there do not lead a sustained economic expansion—just the opposite. Price spikes in these sectors serve to thwart the new economic expansion everyone so desperately wants. The unfortunate consequence is then increased costs (inflation) with stagnant consumption demand.

-a hope that mortgage refi applications signify a consumer back in hot to shop mode. Not for quite a while. See Shift to thrift

We note that selling volume continues to overwhelm buying volume in the stock market. Wise money suspects the market has overpaid the past 2 months. This is where an appreciation of basic math comes in handy: the Shanghai stock market fell more than 70% 2007-2009. Year to date it is now up 46% in a few short months. Sounds great? only if you aren't good with numbers. A loss of 70% needs more than 230% to recoup capital values. 46% is a something but really just a drop in the bucket of the next cyclical expansion. Genuine expansion gains come in legs over many months. This past 2 months has been one excited leg, but ultimately too long means too vulnerable, too unrealistic.

If the market is able to test some important downside targets over the next few months and hold, that would be some green shoots worth noting. I continue to believe that March 2009 may well have been "the" low this cycle, but only the next few months will tell the tale. And this far above March 9 levels, downside risk is now front and center again.